European Union: A New Era For The VAT Taxation Of E-Commerce Ahead: Simplification For Most, Discrimination For Non-EU-Based Traders

The digital economy is growing at a fast pace and policymakers
around the globe are trying to adapt to (and adequately capture)
new ways of doing trade.

In the European Union, a first step towards the taxation at
destination of digital services was achieved in 2015. Starting
then, business-to-consumer sales of telecommunications,
broadcasting or electronically supplied services ("Digital
Services") began being taxed at destination (irrespective of
the provider's place of establishment) and a simplified
collection mechanism (called "Mini One-Stop Shop" or
"MOSS") began being applied for those services. The MOSS
enables reporting VAT through a single web portal for all countries
that Digital Services suppliers are selling into. Registered
taxpayers submit a single quarterly online return and pay VAT
covering all the countries through the portal. It is then the
responsibility of the tax authority to divide up the VAT received
and transfer it to the relevant Member States of the consumers.
(For more details, see our earlier
Legal Update.)

On December 1, 2016, the EU Commission went one step further and
issued proposals aimed at facilitating cross-border trade,
combating VAT fraud, ensuring fair competition for EU businesses
and providing equal treatment for online publications. The
Commission expects the proposals to be adopted by the EU Council in
2017. Entry into force will come in two phases, one in 2018 and one
in 2021.

The four key actions are summarized below:

Identical VAT rates between
e-publications and paper publications

In the current state of play, Member States are allowed to tax
printed publications such as books and newspapers at reduced rates
or in some cases at zero rates. These rules do not apply to
e-publications, which are taxed at the standard rate. This led to
various infringement procedures against EU countries such as France
and Luxembourg, for example (see cases C-479/13 and C-502/13 dated
March 5, 2015).

In order to mitigate this discrimination, the Commission's
proposals allow the Member States to align the rates on
e-publications with those on printed publications. However, there
is no obligation for a Member State to do so, and Member States
will continue to have full control over the budgetary implications
in this respect.

The Commission's proposals also aim to make various
simplifications in the field of e-commerce, to be effective as of
January 2018.

Firstly, one single EU threshold is introduced for intra-EU digital
services with end consumers. Indeed, digital services provided by
taxpayers established in only one Member State for a total value,
exclusive of VAT, that does not exceed 10,000 EUR in the current or
the preceding calendar year will be located in the Member State of
the supplier. This implies that the VAT rules of the supplier's
Member State will apply (including the VAT rate). The same rule
will also apply to the intra-EU distance sales of goods, but from
January 1, 2021.

Secondly, the identification of the place of supply for intra-EU
digital services is simplified for those taxpayers that are engaged
in digital services not exceeding 100,000 EUR in the current and
preceding calendar year. While most traders need two
non-contradictory pieces of evidence (for example, the IP address
and location of the consumer's computer, the address of the
credit card's consumer) for the identification of the location
of their customers, the simplification would require only one piece
of evidence.

Thirdly, the rules of the supplier's Member State will be
applied for invoicing requirements. As a rule, invoicing is subject
to the rules of the Member State where the supply of goods or
services is located for VAT purposes. This rule combined with the
destination principle implies that EU companies active in the
business of intra-EU distance sales of goods have to comply with
the invoice requirements of each Member State where a consumer is
located. In order to lighten this administrative burden, invoicing
will be subject to the provisions of the Member State where the
supplier makes use of the MOSS or the Special Scheme.

Non-EU business applying (and eligible) for the One-Stop Shop will
also get some benefit of the simplification as they will only have
to deal with the rules of the EU country they registered with.

A new "MOSS" as the
rule for e-commerce

Business-to-consumer intra-EU distance sales of goods are
considered located in the Member State where the consumer is
established (provided certain thresholds are exceeded or in case
the supplier opted therefor). This use of the so-called
"destination principle" for distance sales of goods
creates substantial compliance costs to EU businesses as they have
to (i) register for VAT purposes in each country in which a
consumer is established, (ii) charge the local VAT rate, (iii) file
a local VAT return, (iv) pay the local VAT to the local tax
authorities and (v) comply with the local invoicing and record
keeping requirements.

The Commission's proposals contemplate gearing up the MOSS, as
of 2021, to apply to intra-EU distance sales of goods. An input VAT
deduction would then be possible.

End of the VAT exemption for
imports of small consignments

As of 2021, the existing VAT exemption for import of consignments
not exceeding 22 EUR will disappear. The purpose is to fight
against tax abuses (and likely raise additional revenues).
Consequently, all consignments sold by non-EU businesses to EU
consumers will be subject to VAT. Technically, the supply of goods
will be located in the Member State in which the dispatch or
transport of the goods to the consumer ends.

Those traders who would be able to register for the MOSS will
receive an individual VAT number and will be able to submit by
electronic means a quarterly VAT return to a chosen Member State of
identification. They will be able to report supplies if the
intrinsic value of the goods does not exceed 150 EUR. Eligible
traders shall be limited to those duly authorized by the Member
State of identification or established in a country with which the
EU has concluded an agreement on mutual assistance. A non-EU
business is duly authorized when it is regarded as
"trustworthy" (i.e., it has financial solvency, it keeps
records of supplies, it did not commit any serious infringement of
customs legislation and taxation rules, etc.). Further guidance is
expected on that aspect ahead of implementation. It is anticipated
that postal operators and courier services companies will be
playing an active role in collection as non-eligible traders will
have to appoint an intermediary as the person liable for payment of
the VAT.

Simplification,
really?

Taken at face value, the various proposals made by the Commission
will surely bring some simplifications for a number of operators.
Non-EU traders, who were already discriminated against by some of
the provisions of the MOSS, will still face more burdens than most
of their EU counterparts. For example, one can think of the
following:

Non-EU traders will not benefit from
the non-registration thresholds introduced by the Commission for
Digital Services (and, later, for distance sales of goods). Indeed,
a US provider selling Digital Services to EU customers still has to
register and collect VAT from the first euros of sale into the
European Union;

While non EU-traders (considered
eligible) will be able to report under the extended MOSS sales of
goods to EU-based customers, they will only be able to do this for
goods of an intrinsic value of less than 150 EUR;

Special attention will have to be
given to eligible criteria to be met by non-EU traders to be able
to enter into the extended MOSS. Negotiation of new sets of mutual
assistance treaties and protocols or establishment of new standards
shouldn't create obstacles or barriers to trade into the
European Union.

Mayer Brown is a global legal services provider
comprising legal practices that are separate entities (the
"Mayer Brown Practices"). The Mayer Brown Practices are:
Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both
limited liability partnerships established in Illinois USA; Mayer
Brown International LLP, a limited liability partnership
incorporated in England and Wales (authorized and regulated by the
Solicitors Regulation Authority and registered in England and Wales
number OC 303359); Mayer Brown, a SELAS established in France;
Mayer Brown JSM, a Hong Kong partnership and its associated
entities in Asia; and Tauil & Chequer Advogados, a Brazilian
law partnership with which Mayer Brown is associated. "Mayer
Brown" and the Mayer Brown logo are the trademarks of the
Mayer Brown Practices in their respective
jurisdictions.

This
Mayer Brown article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.

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